Written by Wendell Co
National Center for Policy Analysis
There is general agreement the financial crisis that began with the failure of Lehman Brothers on September 15, 2008, was worsened by the bursting of the U.S. housing price bubble. It is also generally acknowledged that some of the fuel for the housing bubble came from a relaxation of mortgage loan standards that allowed many families to purchase homes they could not afford with loans on which they subsequently defaulted.
There is general agreement the financial crisis that began with the failure of Lehman Brothers on September 15, 2008, was worsened by the bursting of the U.S. housing price bubble. It is also generally acknowledged that some of the fuel for the housing bubble came from a relaxation of mortgage loan standards that allowed many families to purchase homes they could not afford with loans on which they subsequently defaulted. New and excessive demand from mortgagees drove up home prices faster than the increase in the housing supply. It is less well understood that the U.S. housing bubble was not a monolithic event. It varied substantially by geography.
Gross national house value increases and losses were overwhelmingly concentrated in metropolitan areas with more restrictive land use regulations — known by a variety of names, such as compact city policy, growth management or smart growth. Many metropolitan areas with these land use restrictions were not able to respond to the increased demand for homeownership caused by the greater availability of mortgage credit.
The inevitable result was higher prices, which encouraged speculation and increased house prices even more. Thus, from 2000 to 2007, among the nation's 50 largest metropolitan markets:
Furthermore, from 2000 to 2007, the gross value of the U.S. housing stock rose $5.3 trillion relative to household incomes. It is estimated that $4.4 trillion of this increase occurred in the 20 major markets with the greatest escalation in housing prices. For the nation as a whole, house values more than doubled from 1999 to the peak of the bubble. From the peak in the fourth quarter of 2006 until the end of 2010, homes values fell more than $6 trillion. Losses after the bubble burst were even more concentrated than house price gains. Consider:
With prices falling and mortgage interest rates rising, households were no longer able to refinance, causing many new homeowners to fall into delinquency and foreclosure. If the prescriptively regulated metropolitan areas had instead had responsive land use regulations, prices likely would have escalated at a much lower rate during the housing bubble. This is because the land price premiums that grew during the bubble would have been less likely to develop, at least to the same degree. If the housing markets in the prescriptively regulated markets had replicated the performance of the responsive markets, it is estimated that the house value losses from the peak of the bubble to the start of the financial crisis would have been $0.62 trillion, one-fourth of the actual loss of $2.44 trillion. The average loss per house would have been $17,000 instead of $67,000. These more modest losses might not have set off the financial crisis, or it might have been less severe.
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Wendell Cox, principal of the Wendell Cox Consultancy in metropolitan St. Louis, Missouri, is an adjunct scholar with the National Center for Policy Analysis, a senior fellow with the Heartland Institute and a visiting fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. He was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley and was appointed by Speaker of the House Newt Gingrich to the Amtrak Reform Council, to complete the unexpired term of New Jersey Governor Christine Todd Whitman. He is a visiting professor at the Conservatoire National des Arts et Metiers, a national university in France. Mr. Cox holds a bachelor of arts degree in government from California State University, Los Angeles and a master of business administration degree from Pepperdine University.